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Greedy financiers undermine free markets: Goar

For more than a decade, Roger Martin, one of Canada’s leading business thinkers, has tracked the rise of a new breed of executives with the talent and chutzpah to command multi-million-dollar pay packages.

In the early days, as dean of the Rotman School of Management at the University of Toronto, he regarded these high flyers with admiration. “What we’re seeing is the strengthening of economic returns to knowledge balanced talent,” Martin told an audience of academics and policy analysts at a public debate in 2009. “The poor aren’t getting poorer and the middle class isn’t collapsing.”

Roger Martin is worried that the “talent class” has lost sight of its responsibility to increase shareholder value in its quest for ever-greater financial rewards.

A few years later, a note of foreboding crept into his remarks. He worried that the “talent class” had lost sight of its responsibility to increase shareholder value in its quest for ever-greater financial rewards.

Now as the head of a think-tank devoted to bolstering the free-market system, his concern has turned to alarm, Unless the corporate leviathans can be reined in, Martin warns, voters will demand radical measures. “This is a fundamental challenge to democratic capitalism,” he told a roomful of executives, business students and invited guests in a lecture at the Rotman School last week.

His talk coincided with the publication of an article he wrote entitled The Rise (and Likely Fall) of the Talent Economy in the October edition of the Harvard Business Review. Aimed chiefly at American readers, it uses entirely U.S. statistics, but the trends are continent-wide.

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Since the mid 1970s, Martin shows, the real wages of 62 per cent of American workers have been stagnant. Shareholders haven’t done particularly well either. Their return on investment has slipped from a peak of 5 per cent in 1979 to 2 per cent today. But the top 1 per cent of earners has grown fabulously rich. “The resulting inequality of income between top talent and routine workers is unsustainable.”

But the problem doesn’t end there, Martin argues. Corporate CEOs are no longer America’s biggest billionaires. Financiers are. Among their ranks, hedge fund managers are the fastest growing segment. They dominate the Forbes 400, which bills itself as the “definitive list” of the wealthiest individuals in American. These modern-day speculators combine rapid reflexes and sophisticated algorithms to exploit the ups and downs of the stock market. “Hedge fund managers don’t care whether the companies in their portfolios do well or badly — they just want stock prices to be volatile,” he says. “What is more they want the volatility to be extreme: The more prices move up or down, the greater the earning potential.” So they deliberately create upheaval.

This hurts shareholders. It hurts companies, creating wave after wave of pressure to slash costs and shed workers. And it hurts the economy, sapping productivity. To make matters worse, governments — particularly the U.S. Congress — enact tax rules that allow top earners to enrich themselves at everyone else’s expense.

“Unless we fix these problems, bad thing are going to happen,” Martin told his Toronto audience. Political leaders, responding to public unrest, will intervene dramatically in the marketplace. The self-styled “masters of the universe” might get their comeuppance, he allows, but democratic capitalism — which he regards as the freest, most dynamic economic system in the world — will be severely damaged, possibly destroyed.

To avert this scenario, he says, three corrections are urgently needed:

Talent (the term Martin uses to describe the ultra-rich executives and financiers who have skewed the economy) must show self restraint. Otherwise society will kill the goose whose golden eggs they are plucking so rapaciously.

Governments must use the tools at their disposal — regulation, taxation, securities rules — to rein in the excessive compensation of the top 1 per cent.

He admits the likelihood of any of this happening in the foreseeable future is low. Neither the Republicans nor the Democrats show any willingness to stand up to the billionaires who fill their coffers at their election time. And there’s little incentive for the market wizards who are benefiting so richly from the current arrangement to voluntarily take less.

Martin nonetheless deserves credit for putting his message squarely in front of the corporate CEOs who don’t want to talk about their extortionate pay packages. He is speaking as an admirer of American capitalism. He is signaling to the executives who read the Harvard Business Review that inequality is a real danger.

Martin calls himself a “shift disturber.” The business world could use more of them.

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